Oil prices scaled six-week highs on Wednesday, breaking above $92 a barrel on mounting fears over supply disruption from the Red Sea and the Strait of Hormuz as hostilities U.S.-Iran hostilities escalated.
The yield on the benchmark 10-year note US10YT=RR hovered near a two-month high of 4.634%.
The U.S. yield curve has barely moved this week, leaving the premium of 10-year yields over 2-year steady US2US10=RR around 37 basis points.
By contrast, 2-10 spreads elsewhere have steepened sharply, reflecting the faster rise in shorter-dated yields, as investors rush to price in a higher chance of rate hikes in the euro zone, Japan, Britain and Canada, for example.
Yields steady after oil-driven selloff
U.S. Treasury yields steadied on Wednesday after a bond selloff on concerns that higher oil prices could reignite inflation and prompt additional interest-rate hikes, with investors also awaiting a sale of longer-dated government debt.
Two-year yields US2YT=RR, which tend to reflect interest-rate expectations, have risen nearly 9 basis points to 4.26% US2YT=RR since Friday, inching toward last week's 17-month high of 4.298%, before a series of tame inflation reports.
Money markets pricing shows a one-in-five chance of a quarter-point rate hike by the Federal Reserve at its July 28-29 meeting, up from around a 10% chance after last week's surprise soft reports on consumer and producer inflation.
"In a lull of domestic data, market participants' focus has turned to the potential for a hawkish surprise at the July FOMC meeting, and market pricing has continued to drift in a more hawkish direction," Jay Barry, head of global rates strategy at J.P. Morgan wrote in a note.
Attention turns to 20-year bond auction
Attention will shift to the Treasury Department's $13-billion auction of 20-year bonds later in the day. Yields on the 20-year bond US20YT=RR held near two-months highs at 5.145% ahead of the sale.
The auction can be digested smoothly, given the higher level of outright yields and less supportive equity valuations, J.P.Morgan's Barry said. A $21 billion auction in 10-year Treasury Inflation-Protected Securities will take place on Thursday.
The 10-year TIPS breakeven rate US10YTIP=TWEB was at 2.351%, its highest since April 2025, indicating the market sees inflation running at about 2.3% in 10 years' time.
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